Regarding the 10% early withdrawal penalty for qualified plans, which statement is true?

• A. Stock purchase is exempt from the penalty
• B. Stock purchase is not exempt from the penalty
• C. All withdrawals are exempt
• D. The penalty applies regardless of circumstances

Answer: (B)

The main idea is that the 10% early withdrawal penalty from qualified plans applies to most distributions taken before age 59½ unless a specific exception applies. Buying stock with the withdrawn funds is not itself an exempt reason, so there isn’t a general exemption for stock purchases. In practice, taking an early distribution for a stock purchase would typically incur the 10% penalty in addition to ordinary income tax on the amount, unless you qualify for one of the statutory exceptions (such as certain types of separation from service, disability, medical expenses, etc.). Therefore, not exempt means the penalty would apply, making the statement that stock purchases are exempt incorrect.